The transparency of the Bitcoin blockchain stems from the fact that all transactions since its inception in 2009 have been meticulously recorded and are easily accessible through Blockchain Explorer.
While some people find this feature important, others perceive the openness of the Bitcoin blockchain as a major obstacle to privacy. However, there are ways to ensure complete confidentiality of transactions. One popular approach is to use crypto-mixing, also known as tumblers, to pool and mix bitcoins before sending them to intended recipients.
Understanding the role of privacy in crypto mixing
The basic concept of crypto mixing is that mixing hides the source of the bitcoins, making it difficult to identify the exact sender and recipient. An open searcher can only detect that someone like Mr. A sent bitcoins to the mixer along with 12 other people, and that Mr. B received bitcoins from the mixer along with 12 other people.
The legality of crypto mixing
Crypto mixing can be broadly classified as centralized and decentralized: Centralized mixers, such as crypto mixers, are operated by companies that receive bitcoins, mix them, and return the different bitcoins to users for a fee. Centralized mixers offer a convenient solution for storing bitcoins, but privacy concerns arise as these mixers can disclose records. Alternatively, decentralized mixers like Wasabi and JoinMarket use collaborative or peer-to-peer technologies based on crypto mixing protocols to ensure that transactions are completely private. In essence, large groups of users combine and redistribute specific amounts of bitcoins, making it extremely difficult to trace specific transactions.
How to choose the right crypto mixing service
Crypto mixing has many advantages, but it is not without its limitations. It is extremely difficult to find people who participate in a mixer with exactly the same amount of bitcoins (except for tumbler fees). This can leave law enforcement agencies with information about the address of the first suspect vulnerable to tracing the flow of funds if the second suspect receives a slightly smaller amount. Solving this problem is becoming increasingly complex as the number of mixer users grows.
Some exchanges have banned the entry and exit of mixed bitcoins because they can detect the use of mixed bitcoins. These ‘tainted’ mixed bitcoins are likely to face obstacles when trying to withdraw or deposit on platforms such as Binance. Other notable crypto mashups include Samourai and JoinMarket. It is important to note that not all mixer services are reliable and their effectiveness in hiding financial transactions varies. It is highly recommended to do some research before using a mixing service.
The legality of crypto mixing depends on the jurisdiction: In February 2021, former US Assistant Attorney General Brian Benchkovsky declared that using a scrambler to hide crypto transactions is a criminal offense. This was followed two months later by the arrest of Roman Stalingov, a Russian-Swedish citizen and founder of Bitcoin rolling service Bitcoin Fog, by US authorities for aiding and abetting a $335 million money laundering operation. Similarly, in August 2021, Larry Harmon, operator of crypto-mixing Helix, was found guilty of facilitating the laundering of nearly US$300 million for criminals in the underground markets. The introduction of new anti-money laundering regulations, such as the Financial Action Task Force’s ‘Travel Rule’ and the European Union’s AMLD-5 Directive, could lead to greater oversight of money laundering activities. As a result, bitcoin tumblers that rely on exchanges participating in the broader cryptocurrency ecosystem may find it more difficult to survive. Please note that this information is for informational purposes only and should not be considered as legal advice.
